DWS: Markets respond swiftly to likely Trump election victory, with yields and equities rising

DWS: Markets respond swiftly to likely Trump election victory, with yields and equities rising

6 november 2024

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Trump (Photo credits Pete Linforth)

Market reactions to the likely election victory of Donald Trump are, for the time being, a continuation of the “Trump trade” we have seen in recent weeks. According to DWS, U.S. Treasury yields are rising sharply, especially in the longer maturities, as the trend towards higher inflation and, above all, looser fiscal discipline will likely be on the agenda in the weeks ahead. U.S. equity futures are reacting positively, while skepticism seems to prevail in Europe. The U.S. dollar seems to be strong, and Bitcoin is also rising, though not as much as might have been expected. Gold’s reaction remains rather unspectacular for now.

Market and Policy Implications

DWS points out that markets are generally uneasy with heightened uncertainty. With the U.S. presidential race seemingly over after an orderly election, at least investors are feeling some clarity. However, certain issues remain uncertain, such as Trump’s tariff plans and potential corporate tax changes, not least while the balance in the House remains unclear. Another important factor is the movement of Treasury yields, which, according to DWS, could lead to some volatility on Wall Street if yields rise beyond a certain threshold.

Taking a step back, DWS suggests that the medium-term impact of the election may be less significant for equity markets than it appears in the immediate aftermath. During Trump’s previous presidency, the S&P 500 gained about 70%, and markets have seen a similar rise of about 80% under Biden. This indicates that other macro factors may have a stronger influence on equities than political shifts alone.

DWS also highlights that a Trump administration may pose challenges for the European economy, especially Germany’s. Given current conflicts in Ukraine and the Middle East, Trump’s unpredictable policies could weigh on sentiment among both consumers and investors. The risk of tariffs on European imports might create further uncertainty for companies, potentially delaying investment decisions as businesses await clarity. This situation could lead to a slight deceleration in European growth, according to DWS’s outlook.

Fixed Income & Currencies

For U.S. Treasuries, DWS anticipates that the likely election outcome signals rising yields, particularly for long-term bonds. Concerns around looser fiscal policy and a mild inflationary trend may drive this movement. Shorter-dated yields could also feel pressure if the prospect of fewer Fed rate cuts becomes more likely. However, a divided Congress might limit Trump’s fiscal policy options, which DWS suggests could moderate any yield increase, avoiding a drastic bond sell-off. In Europe, DWS notes, core rates could see volatility and may trend higher as the market responds to rising deficits. Tariff risks might also lead to further rate adjustments within the Eurozone.

On the currency side, the U.S. dollar has shown strength recently, which DWS attributes less to Trump and more to strong U.S. economic data and rising U.S. bond yields. DWS outlines three factors driving the dollar outlook: high fiscal spending, Fed independence concerns, and potential new tariffs, all of which could contribute to sustained dollar strength in the short term.

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